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This Financial Stock Could Be Severely Undervalued

Tuesday - 4/9/2013, 3:48pm  ET

With American stocks edging higher, investors might have more trouble finding good opportunities in domestic equities. Bargains, however, abound in European markets. Those Eurozone stocks that trade in the US through an ADR can be particularly attractive. One such stock is ING Groep . ING is a Dutch-based multinational financial company specializing in banking and insurance. Its retail banking segment is strong in the Netherlands, Belgium, and some central European countries, and it also has some presence in Asia. Furthermore, through its ING Direct brand, the group has a leading global presence in the growing online banking sector. Its insurance operations are strong in the Benelux area (Belgium, Netherlands & Luxemburg) and central Europe, with a significant presence in both the United States and the Asia/Pacific region.


ING has a current P/E of 12.69, which is close to the industry's average, and not particularly attractive. It is similar to that of competitors like Prudential Public Limited , but less attractive than others like AEGON , which has a P/E ratio of just 6.94. However, when factoring in future earning estimates, ING's forward P/E drops to just 4.07, making it one of the most attractive in the industry (compared to AEG's 6.22, or PUK's 10.85). The same applies when factoring in growth: ING's PEG is a very attractive 0.45. P/B ratios also help paint a bullish picture in terms of valuation: The stock's P/B is just 0.42. Prudential's P/B is a more average 2.61, but AEGON's is also a very attractive 0.31. All these ratios help support the idea that ING might be greatly undervalued, especially when taking into account future earnings and growth potential.


Wall Street analysts are bullish on the stock: It currently has an average recommendation of 1.50 (buy-overweight), and an average price target of $11.71. Based on this price target, the stock could have a potential upside of almost 60% from current price levels. However, as with most ADRs, the stock is not covered extensively by analysts in the US, and many of these ratings are compunded from relatively dated reports. Analysts are mostly neutral on AEGON, and bullish on Prudential Public Limited.

  P/E Fw P/E P/B PEG EPS q/q Avg Rec Avg PT (%implied upside) Div Yield
ING 12.69 4.07 0.42 0.45 71.15% 1.50 $11.71 (+59.1%) N/A
PUK 12.22 10.85 2.61 1.36 111.46% 1.00 $37.27 (+16.4%) 2.81%
AEG 6.94 6.22 0.31 - 850.25% 3.00 $6.43 (+7.71%) 4.19%

Price movements

The stock is currently trading almost 30% off its 52-week high of $10.47, and 33.5% above its 52-week low of $5.51. It has not had a good run this year, as its price has dropped more than 20% YTD. This drop has been accentuated in the last few weeks, likely due to the Cyprus crisis. The stock reached a historical high of $46 in October 2007, before plummeting to a historical low of $3.16 during the midst of the 2009 financial meltdown. It has currently recovered more than 60% from its 2009 lows, but it is still far from reaching its pre-crisis levels.


ING last paid a dividend to its ADR shareholders in August 2008, before scrapping it in the midst of the financial crisis  Prior to that, the company had regularly paid a biannual dividend. European banks tend to have strong dividend policies, so ING could reinstate its dividend in the future. ING's competitors, however, do pay dividends: Prudential yields 2.81% and AEG 4.19%, making the latter the most attractive of the three.


On Feb. 13, ING reported €2.6B in underlying net profits for the quarter, down 5.2% from 2011. These relatively weak quarterly results were impacted by the Dutch bank tax (€-175M), negative credit adjustments (€-151M), and de-risking losses (€-151M). The insurance results, however, improved, with the investment spreads strengthening. Future results are expected to improve, especially in the banking segment, with a projected EPS growth of almost 30% in the next 5 years. However, one worrisome aspect is the company's high debt management risk, high debt-to-equity ratios (4.01), and current weak momentum.

The bottom line

As with many other Eurozone stocks, ING's stock has not enjoyed the good run year-to-date that most other stocks have. Euro debt crisis woes, accentuated by the Cyprus situation, have not helped a stock that was already dropping due to a relatively weak earnings report. However, current prices might be a great entry point. The stock's valuation ratios are very attractive, especially those dealing with future earnings and growth. Furthermore, analysts are mostly bullish on the stock, and its average price targets imply generous stock price growth from current levels. However, as with other Eurozone stocks, the road to recovery might be bumpy. 

This article was originally published as This Financial Stock Could Be Severely Undervaluedon

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